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GROUPER Ltd. had earnings per share of $4 as at December 31, 2015, but paid no...

GROUPER Ltd. had earnings per share of $4 as at December 31, 2015, but paid no dividends. Earnings were expected to grow at 16.3 percent per year for the following five years. GROUPER Ltd. will start paying dividends for the first time on December 31, 2020, distributing 50 percent of its earnings to shareholders. Earnings growth will be 5 percent per year for the next six years (that is, from January 1, 2021 through to December 31, 2026). Starting on December 31, 2026, GROUPER Ltd. will begin to pay out 80 percent of its earnings in dividends and earnings growth will stabilize at 2 percent per year in perpetuity.The required rate of return on GROUPER stock is 10 percent. What should be the current share price of GROUPER?

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Answer #1

current share price = present value of dividends upto 2026 + present value of terminal value at end of 2026

Terminal value at end of 2026 = dividend in 2026 * (1 + growth rate after 2026) / (required return - growth rate after 2026)

Present value = future value / (1 + required return)number of years

current share price = $58.13

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